Everything a seller needs to know about dealing with returns is here:
https://www.ebay.co.uk/help/selling/managing-returns-refunds/handle-return-request-seller?id=4115
There are posts literally every day from sellers who have refunded before the item has been returned.
The only way to move forward now is to communicate with the buyer and convince them that they shouldn't (morally at least) keep the item and the money.
"There are two ways to be fooled. One is to believe what isn't true; the other is to refuse to believe what is true.”
Søren Kierkegaard, Danish philosopher (1813 - 1855)