You can mark it as dispatched by generating the label. It will still be unused and if the buyerpaid for postage it will be refunded to them in 30 days. If you paid for it you can't get a refund because you are not sending by trackable postage. The payment will be held for 14 days.
You will have no proof of delivery so if it's more than a few pounds it's safer to cancel/refund the transaction with the buyer's agreement (via the dropdown actions menu arrow for the item on your orders list) and relist as collection for the buyer to buy and pay again.
The buyer will then receive a collection code to give to you to prove they have the item. See "Proof of collection" on here:
https://www.ebay.co.uk/help/selling/posting-items/setting-postage-options/local-collection?id=4181