If you have the item and the buyer's money one has to go, so cancel the order which will fully refund your buyer.
Click on the item sold, then top let to View Order Details.
From the right and More Actions select Cancel this Order selecting .... Problem with Buyer's Address. This fully refunds the buyer and your seller performance is not affected.
Perhaps send a message to your buyer, to explain what has happened and a refund is being processed.
Unless they give you a genuine reason for the return and wishing to rebuy the item, personally, I would also block them from returning.
https://www.ebay.co.uk/bmgt/BuyerBlock?
@alexandra68cats