The government has been defeated in the Lords over its refusal to offer people who bought ID cards a refund.
Ministers are legislating to scrap ID cards but 12,000 people had already bought one, at a cost of £30 each.
In a debate on the Identity Documents Bill, peers backed a Labour amendment by 220 votes to 188 to compensate them, arguing it was an issue of "fairness".
The Home Office said £292m had already been spent on ID cards and it would try to overturn the vote in the Commons.
Among those who spoke in favour of the Labour amendment were Lib Dem and Tory peers , whose parties had opposed the ID card scheme.
For Labour, Lord Hunt said it was not fair to refuse a refund to those people who had bought cards since the 2009 roll-out in Manchester.
"People are simply expected to have this right taken away from them without any compensation or recompense at all. I do think that really is a rather extraordinary principle to adopt and I do think it does impact on the reputation of governments as a whole," he said.
Lib Dem Lord Phillips, who led his party's opposition to the Identity Cards Act 2006, said it amounted to a "simple but basic issue of fairness" - he later voted in favour of the Labour amendment.
Conservative peers Lord Mackay, Lord Deben - the former cabinet minister John Gummer - and Lord Vinson all abstained.
Crossbencher - and former Chief of the Defence Staff - Lord Craig of Radley said during the debate: "I'm very concerned that for a very small amount of money, the government is taking this very intransigent attitude."
He said he doubted everyone who had bought a card would seek a refund - so estimates that it could cost £400,000 to reimburse them were likely to be too high.
Conservative Lord Vinson said it was "morally indefensible".
"It's not just a small sum of money, which makes it particularly stupid, but this sort of thing does the government, any government, those of the ruling political class, no good."
For the government, Lady Neville-Jones said it had always been government policy to scrap ID cards "at least possible cost to the taxpayer".
"Our primary purpose has been to prevent additional expenditure when we can avoid it. We have no option but to pay compensation to some contractors because we are tied in by the contracts negotiated by our predecessors.
"We don't agree that there is a contract between the government and cardholders who have received a service and nor do we believe there is any expropriation or rights under it. The cardholders are not the card owners - the card is government property."
A Home Office spokesman said the government would seek to overturn the defeat when the bill returned to the Commons.
He said: "The identity card scheme has already cost the taxpayer millions of pounds. Combined with development work on biometric data, some £292m has been spent on ID cards. The amendment to pay refunds would add a further cost to be picked up by the taxpayer."
The cards already in circulation will remain legal until the legislation has been passed to abolish them and the National Identity Register.