Peers approved an amendment by the former Law Lord, Lord Ackner, to reverse the drastic restructuring of the Criminal Injuries Compensation Scheme.
Under the old scheme compensation was based on an individual assessment of need and loss. But in April a tariff- based system, with flat sums for each offence was introduced. The new system has substantially reduced payouts to victims of violent crime, who are no longer compensated for earnings lost as a result of their injuries.
Lord Ackner said: 'The new system ignores a fundamental test of justice and fairness - the principle that compensation should be paid according to need.'
Earl Ferrers, for the Government, argued that the old system's emphasis on individual assessment made it slow, cumbersome and uncertain. He said the new scheme would remain the most generous in the world, with most victims getting as much compensation as before and more quickly.
But, accusing the Government of 'sheer hypocrisy,' Lord Ackner said: 'The real purpose of this move is to cut costs.'
Reacting to the Lords' defeat, a Home Office spokesman said last night that the Government would be inviting the Commons to reverse the amendment.