All you needed to do was cancel the sale at buyers request,the buyer would have been refunded and you would have your seller fees credited.
You must refund in full when an item is cancelled you then get your seller fees credited by eBay,if you don't refund the balance voluntarily and the buyer appeals to eBay you wont get the fee credit.
If you refuse to refund and the buyer does a chargeback for the balance you are likely to have an admin charge of £16.80 applied on top of the refund.