The six-month independent review of IP laws will look into whether the UK should allow more use of copyrighted material without copyright holders' permission, a move likely to meet with opposition from copyright-based businesses such as the music and film industries.
It will report on the changes to be made to UK law as well as what the UK's long term aims should be in relation to IP in an international context.
"We are reviewing our IP laws, to see if we can make them fit for the internet age," said Prime Minister David Cameron.
"The future of the economy lies in the highly skilled, technology sectors. For many of those companies their intellectual property is their most valuable asset," said Baroness Wilcox, a minister at the Department for Business, Innovation and Skills (BIS). "We must ensure the intellectual property system helps not hinders those companies."
"This review will look at what changes can be made to our intellectual property system to ensure it helps firms grow," she said. "The internet has fundamentally changed the business landscape. Some sectors, such as the creative industries, have been transformed by the internet. The intellectual property framework must keep pace."
"An IP system created in the era of paper and pen may not fit the age of broadband and satellites. We must ensure it meets the needs of the digital age," she said.
The review will examine what barriers IP law places in the way of new, internet-based businesses; it will look at how expensive and complex IP enforcement is; at the interaction between laws on IP and on competition; and on the costs that small businesses face when trying to protect IP.
The copyright reforms were given a cautious welcome by Jim Killock, executive director of digital rights campaign body the Open Rights Group (ORG).
"The problem David Cameron will come up against is that 'fair use' may be difficult, if not impossible, to establish in current European law," Killock said in a blog post. "EU copyright does not allow a general, US-style 'fair use' provision, but has an exhaustive list of possible user rights, like format shifting, back ups and parodies. Each EU country chooses which rights they wish to allow."
"The prize is big: innovation and flexibility for citizens and tech industries rather than the dead hand of maximalist copyright laws," he said. "But we’ve been here before, after Labour’s Gowers report, so we know the fight will be hard. In this, we wish the coalition good luck."
The Gowers Review of Intellectual Property in 2006 was a fundamental review that made major recommendations aimed at modernising IP law, but Killock said that industry lobby groups successfully argued that those changes would damage their businesses.
The Government also announced that the Intellectual Property Office (IPO) would trial a 'peer to patent' system, in which individuals could identify any previous inventions that might invalidate a patent application.
"Patent examiners cannot be expected to have access to all the information already in the public domain and this project aims to address that," said an IPO statement. "In the trial selected patent applications would be available for people to comment on and crucially rate each other comments. The highest rated comments would then be submitted to the patent examiner."
