Unlocked iPhone doesn't work in UK

I recently bought an iPhone 4S and the seller claimed the phone was unlocked but doesn't work in the UK (which is where I stay). So upon receiving the phone I placed an O2 sim card in it and the phone recognised the sim. It had plenty of signal and 3G but then once the phone was registered I lost all signal. Why, if the phone is unlocked, would it not work in the UK? I'm slightly confused here
As a small test I reset all the settings, registered again and this time the signal stayed around so tried phoning it, but to no avail.
At first I thought it might be the antenna but it does receive signal and recognises the network of the sim

I've done an IMEI check and it has come up saying that the phone is blacklisted in the UK. I'm demanding a refund for the phone as the seller did not state that it was blacklisted and on closer inspection there are several small details which seem very dodgy. Like the SIM tray has been changed for another as the IMEI and serial numbers don't match up.
Thanks for the responces people! Much appreciated

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