[mothered]

"the system won't allow them to give a refund before it's returned".

Of course It will. It depends how It's processed. When they do their stock take and there's variances (which there will be), do they leave It on their system Indefinitely?

If they class the Item as a write-off, a refund can be Issued without the receipt of goods. For simplicity In this case, use the box method.