customer returned an item for a refund but the item came back damaged. What is the process for this?
What do your shop policies say?
You haven't filled in your policies, so legally your customer is always entitled to a full refund, no matter what condition the return is in, sorry. They didn't actually have to return it at all, you are still liable for the refund.
Once you have refunded this order, I strongly recommend you fix your policies to protect you in the future.
You must have a GDPR privacy policy and put the physical address of the business in the area called Seller Details.
You also need to be sure all your listings have the 30 day minium returns window set (technically it is 14 days for the customer to notify you, and a further 14 days for them to return the item, but Etsy doesn't have an option for that).
Without the proper policies, all customers have a default of at full year to demand a refund, for any reason, without returning the item, ouch.
With a returns policy in place, it will say that you can deduct the value of damages etc.
Your policies say ''Buyers are responsible for return shipping costs. If the item is not returned in its original condition, the buyer is responsible for any loss in value.''
However, I noticed that you don't have policies attached to several of your active listings that I looked at. Hopefully, you did have it attached to that item.
You can check to see which listings don't have policies by going to your Dashboard > Listings > Return & exchange policies (right side column) and click 'all'.
I can't see your "Terms & Conditions and Right of Withdrawal" section. It should be just above your Privacy Policy and Seller Details. It should explain consumer rights, your cancellation and returns procedure and include the cancellation form wording required by UK law.
UK laws require sellers to display certain information, when you don't comply you are not protected.
You also need to complete policies correctly for Etsy's Seller Protection:
https://www.etsy.com/legal/policy/purchase-protection-programme-for/34509585385 - see 2.F
Without all policies correctly completed Etsy's claim bots will automatically approve all buyer claims and refund from the seller's shop account.
Etsy's basic explanation:
https://www.etsy.com/legal/policy/selling-to-eu-and-uk-buyers/239965962014
Better info from Trading Standards:
https://www.businesscompanion.info/en/quick-guides/consumer-contracts/selling-and-supplying-goods
https://www.businesscompanion.info/en/quick-guides/distance-sales/consumer-contracts-distance-sales - pay attention to information requirements.
https://www.businesscompanion.info/en/quick-guides/good-practice/writing-a-returns-policy
and Privacy Policy help: https://www.etsy.com/seller-handbook/article/59160674124
Lawrence (Clare's other half)