Buyer - please allow your seller time to make enquiries on your behalf. Royal Mail will not declare a parcel (or letter) missing until 15 working days after it was sent. Some sellers will agree to refund within that time, some will refund you when they submit their claim to Royal Mail and some will insist on waiting until Royal Mail has reimbursed them. Remember that you have 45 days to submit a paypal claim, so it is worth hanging on as long as you can - provided you feel the seller is doing their upmost to resolve the issue. Some seller will claim it is not up to them to pursue the matter and either offer to send you their proof of posting to take the matter up yourself (it is possible for the buyer to make the claim) or wash their hands of it altogether. You will take their attitude into account when deciding whether or not you need to submit your paypal claim.
Seller - If tracking indicates that the item is lost or you have no tracking for the missing item, you have no option but to refund the buyer in full. You can make a claim for compensation from your Courier or Royal Mail, provided you have at least a proof of postage certificate. You will need to complete a form, available from any post office, and you can expect to wait up to 3 weeks to receive your refund. It is up to you to decide at what point you will refund your buyer - before submitting your claim, on submission or when you yourself receive your refund from the post office.
For those sellers whose terms and conditions state that they are not responsible for items that go missing in the post - YES YOU ARE!!