The government is to scrap an archaic law that makes it illegal for music fans to download a legally-purchased CD onto a laptop, smartphone or MP3 player, and has rejected calls from record companies for a tax to cover lost sales as a result.

Vince Cable, the business secretary, unveiled the plans on Thursday in a 52-page report detailing a freeing up of the UK's intellectual property and copyright laws.

Cable, responding to the Hargreaves report on the future of intellectual property published last year, proposed changes including making "format shifting" legal and relaxing parody laws to allow comedians, broadcasters and other content creators more scope.

Millions of British consumers have been format shifting, for example uploading a CD onto an MP3 player or laptop, for years without realising that it is actually illegal.

"Bringing the law into line with ordinary people's reasonable expectations will boost respect for copyright, on which our creative industries rely," said Cable. "Making the intellectual property framework fit for the 21st century is not only common sense but good business sense."

The copyright exception relating to format shifting will only apply to legally purchased music for personal use.

Submissions to Cable from music companies and other rights holders recognised that private copying is ubiquitous and needs to be recognised in law, however the "great majority" felt that this would also "cause them unreasonable harm" and adversely affect music sales.

The rights holders asked Cable to introduce a levy, licence or tax to copying devices – laptops, phones and MP3 Players – "in order to compensate for this harm, as is the case in some other European countries".

However, in the report, called Modernising Copyright, the government says that the change will have a "minimal impact on sales" and rejected the idea of a levy or tax.

"Levies or other compensation are neither required nor desirable in the context of a narrow provision that causes minimal harm," the report states. "Levies are an unnecessary and inefficient tax on consumers. Furthermore, particularly in the current economic climate, it is not right to extract more money from the pockets of hard pressed consumers."

Geoff Taylor, the chief executive of music industry body the BPI, said that record companies support a "sensible updating" of copyright law.

"Record labels are digital businesses and want consumers to be free to enjoy their music legally on all their devices," he said. "That's why we have already licensed a range of online storage services from Apple, Google and Amazon amongst others. We support a sensible updating of copyright for the digital age and will look at the detail of [the] government's proposals, to be published next year, to ensure that they support licensing of innovative new services and do not have unintended consequences for the UK's economically important creative sector."

The report outlines 10 major changes to free up copyright and intellectual property laws including around research, education, the use of quotations and parody.

For example laws around parody are currently considerably more stringent than in countries such as the US.

"The consultation document suggested that the UK may be at a disadvantage on the world stage and that British broadcasters, production companies, and creators who produce commercially valuable parody works may be inhibited from making the most of their potential," the report said. "It was also recognised that there is a growing trend for user-generated, often non-commercial, parody content on YouTube and similar websites."

The response from ITN, the ITV and Channel 4 news producer which licences film clips for parody and other uses, said that the proposals "would have a dramatic cumulative effect on revenue streams".

The government's report said that the relaxed parody, caricature and pastiche rules "should strike a fair balance" and would be "unlikely to result in a significant loss of licensing revenue".

"We feel we have struck the right balance between improving the way consumers benefit from copyright works they have legitimately paid for, boosting business opportunities and protecting the rights of creators," said Cable.

The recommendations include the establishment of a digital copyright exchange by the end of 2013 to act as a "one-stop shop" to make it easier to get clearance for the use of copyrighted content. The government chose to conduct a further study on the feasibility of the exchange, published at the end of July, which meant the formation of the body has been delayed.

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