Hi,
Although not registered as such you are clearly a Business.
Therefore the buyer is within their rights to cancel the order under Distance Selling Regulations.
You need to refund the payment and once you have done so you can send the buyer a 'mutual cancellation' request in order to get the final value fee credit. Let them know in advance why you are doing so and ask them to agree to it:
http://res.ebay.co.uk/ws/eBayISAPI.dll?CreateDispute&DisputeReason=2&guest=1
Here's the page with link to upgrade to a Business seller, whicih you need to do pronto as HMRC are having a crackdown on Internet sellers!:
http://pages.ebay.co.uk/businesscentre/identification/index.html
With regards to courier, then you'll obviously need to cancel!
Even a Private seller would be advised to refund the buyer if they don't want the item. Otherwise they can claim non receipt or deliberately damage an item in order to open a dispute. You then end up with something you can't re-sell.

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