THE government was defeated on the Trade Union Bill for the first time yesterday as peers united to oppose party funding changes that could “damage democracy.”

Tory Business Minister and former Tesco boss Baroness Neville Rolfe claimed that imposing an opt-in system on trade union political levy payers would not affect party funding.

But Labour shadow Lords leader Angela Smith said she was “wrong — or at the very least, in denial” over the consequences of the changes, which Labour believes would cost it £6 million a year.

“I hope that we would be able to find agreement that it would be totally wrong for any government to use its power to attack the funding of other political parties — particularly the official opposition,” Ms Smith told the Lords.

Labour tabled a motion calling for the changes to be examined by a select committee, which could “take an independent view, away from the heat of party-political debate.”

With the support of independent and Lib Dem peers, Labour defeated the government by 327 to 234 — a majority of 93.

“The Tories must not be given a free ride to remould our democracy in their favour and we have shown that we will stand in their way,” said Lib Dem peer Paul Tyler.

The defeat will boost opposition to the Trade Union Bill as the government sets out further plans today for thresholds on strike ballots in important public services.

TUC general secretary Frances O’Grady accused ministers of threatening a “fundamental British liberty” and trying to “brainwash” the public into thinking that strikes are out of control.