Ok I made a little more progress:
I created a brand new test user in itunes connect. From doing a bit of research I read one developer signed out of his ipad, and did not sign back in even with the test account
I followed this and activated the IAP. This time, the purchase actually completed - great!
However, after I hit Buy, it keeps prompting me continuously to make the purchase. If I hit cancel at any time, it stops but then the purchase shows failed.
Ah well, getting slightly closer...