This issue is now resolved – please see http://www.xbmc4xbox.org.uk/2013/01/good-news-paypal-account-restored/
We have a donation page where we have accepted donations via Paypal for the project and site. This money goes towards the project, with money sent to developers, and helps covering costs etc.
Today I received an email from Paypal informing they have frozen my account.
Dear Julian Wills, We are hereby notifying you that, after a recent review of your account activity, it has been determined that you are in violation of PayPal's Acceptable Use Policy regarding your sales / offers on www.xbmc4xbox.org.uk/forum. Please refer to: - Transaction x - Transaction x - Transaction x Therefore, your account has been permanently limited. Per the User Agreement, when PayPal permanently limits an account due to an Acceptable Use Policy violation, we may hold your funds up to 180 days. We will review your account at 30 days from the date of this email, we will calculate our exposure and will release any excess funds to you for withdrawal. If there are any funds remaining in your account at this time, we will review your account every 30 days until either all your funds have been made available to you for withdrawal, or a period of 180 days from the date your account was limited is reached. Please log in to your PayPal account and verify that your account information is accurate, as PayPal cannot be held responsible for incorrect information provided by the account holder. You will need to remove all references to PayPal from your website/s and/or auction/s. This includes not only removing PayPal as a payment option, but also the PayPal logo and/or shopping cart. The PayPal User Agreement states that PayPal, at its sole discretion, reserves the right to limit an account for any violation of the User Agreement, including the Acceptable Use Policy. Under the Acceptable Use Policy, PayPal may not be used to send or receive payments for items that encourage, promote, facilitate or instruct others to engage in illegal activity. The complete Acceptable Use Policy can be found at the following URL: https://cms.paypal.com/uk/cgi-bin/?cmd=_render-content&content_ID=ua/AcceptableUse_full&locale.x=en_GB To learn more about the Acceptable Use Policy, please refer to our Help Centre page here: https://www.paypal.com/uk/cgi-bin/helpweb?cmd=_help We thank you in advance for your cooperation. If you have any questions, please contact the PayPal Brand Risk Management Department at euaup@paypal.co.uk. Sincerely, Nadine PayPal, Brand Risk Management
So it looks like I am guilty until I have proved my innocence. It is strange they refer to the forum link rather than the main site url. Am I being accused of something they have found on the forum? Hard to know since they give no real information at all to what I am guilty of. “PayPal may not be used to send or receive payments for items that encourage, promote, facilitate or instruct others to engage in illegal activity.” – in reference to? Are they suggesting XBMC4XBOX facilitates/encourages or instructs people to engage in illegal activity? Are they referring to the software itself or some specific forum discussion ? Hard to know, but no project donations have been used for anything like this. The transactions they listed in the email are just donations to the project from users. All money goes towards project costs, and to developers for their time.
Googling for this sort of email shows it happens by mistake time and time again. From freezing charity donation funds, to other cases similar to ours. I have had my Paypal account frozen twice before, firstly when a card expired (some random security audit), and a second time when I made a transaction from another country and it was frozen since I was connecting from a different geographic location. Both times were a pain to resolve, even though I did nothing wrong, which seems to be the way Paypal like it.
I have already spoken to them on the phone. But guess what, they can’t do anything, because I need to speak to the “AUP” team, who of course only have an email account. Email has been sent. I wonder how long this will take to resolve. I suspect later rather than sooner. It’s also worth noting that a note on my paypal account states “This limitation cannot be appealed against.“ – that’s fair!
*update*
I realise the article title with “Guilty until proven innocent” is not that well worded, and this is in relation to the AUP and not a court case. In hindsight I could have made it clearer. In fact it has been decided I am guilty of breaking the rules, with no real information as to how, and with no right to appeal the decision. Oh and hi to all the visitors from reddit that have kept me up late making sure the server doesn’t fall over 
Interesting to read other peoples stories and opinions.
Please do tweet/facebook/link to this post. If it gets some attention you never know, Paypal might actually look into it.