So long story short, I think the shop clerk didn't scan my item and kept it for himself
Amazon have told they haven't received anything, I returned it using their prepaid postage, which is a Royal Mail tracked 48 hour service. I returned it on the 13th March and then bought the same item as it was defective.
On Sunday, my usual local post office is closed, so I thought I might as well go to the Post Office corner shop. The receipt is legit and has the same tracking number.
The tracking is XC262712275GB.

I did return various other items using Amazon's prepaid labels, and they had tracking information on the same day but this has been nearly a week. I think the shop clerk was also dodgy as he was quite young and looked like he didn't know what he was doing with all the typing in his machine.
I had a look, and all I can see is that eBay's prepaid stamps also have the same problem with tracking not updating, but Amazon's labels have worked before, so I'm taking that excuse. I did see him put it in the sack to be returned.
What are my steps now? Shall I file a lost form (requires 10 business days, so not yet but soon)? Call RM? I believe he has stolen it, as the system doesn't recognize the number at all and I double checked. If it was scanned, it would have given some information of it being received.