Celeste I do agree completely with the logic behind that.
But in practice it will not work. The police will give him the phone straight back and he will not be charged with theft of money as there is no proof. They probably will not be interested in the theft of the phone (which is still a crime) but remember by taking it there you are confessing a crime. Prostitution may be legal in the UK but theft is not.
Unfortunately in criminal law you can't steal goods to the value of those someone has stolen from you. One offence doesn't cancel out another and the police are not there to mediate disputes between people (as the courts do in civil law and family law matters). They have targets to meet in regards how many offences they charge people with, and they will happily charge you OR him OR both; depending on whether or not they have sufficient evidence, not depending on the morality of the situation.
Keep the phone for a bit in case he pays you off, if not, then get rid of it. As someone else said he will be unlikely to report it. In his mind he's thinking... does he want a court case (remember court records are public) which will include mention of him robbing (and using) a prostitute for the sake of retrieving a £300 phone? I very much doubt it.
If you're freaking out and feel nervous having his phone in your house, chuck it in a river.