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Hello, my name is Jim and I am a qualified lawyer happy to help you today.
You can and should insist they take the item back at their cost - if you simply changed your mind about the item then you would have to pay the cost for return postage - that does not apply here as the item was faulty. I attach a template letter for you to use. I would give them 7 days to reply and if no reply then send them a letter before action (also attached) and start a claim after 14 days at http://www.moneyclaim.gov.uk for your money back.
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They need to arrange for the return of the item - the consumer law states this - which means when they collect the item then need to bring packaging with them. They are trying to fob you off and suggesting the consumer law doesn't apply to them - you should report them to Trading Standards on 03454 040506 if the company maintains their stance
Yes, the law states that you should not be charged (for a faulty item) to be returned so it would be against the law to charge you. It is up to them to retrieve their faulty goods and they cannot pass the risk on to you either