Scrap that comment I made above, I obviously didn't read freeSbee's post properly (my fault).
I did those instructions i.e.
1. modules/bakery/payment_methods/paypal/ipn.php -> changed line 33 to $debug = true; // Enable debug mode
2. Saved and re-uploaded ipn.php to its place.
3. Enabled CHMOD 777 on ipn.log in the same directory.
4. Deleted all cache, cookies, history, etc. in Firefox and closed it.
5. Re-opened Firefox (and on Chrome) and made a purchase in the online shop.
6. Still get the PayPal error message when redirected to PayPal for the payment.
7. Checked ipn.log and it is still an empty file.
The PayPal account has been verified with no restrictions in place now.