Most such classes will state in the description of the class that they accept students of all abilities.  If you don't say that in your description, you certainly have the right to tell the parents that you apologize but are not able to accommodate this child's special needs in this particular class at this time.  Tell them you feel their child is being short-changed as a result of you not having the staff or experience to accommodate him.  Don't make it sound like it's the parents or the child's fault.  Give them a full refund and point them towards a more appropriate class or facility.