PATHS means adding a path to the project settings, here: folder "UTF8tools"
There are many project settings. Do you mean "Other unit files (-Fu)"? You should
never use it for library code! Lazarus packages are meant for that purpose and UTF8tools provides a package. Use it please. It may solve the acute problem but the fundamental problem is having 2 units with identical names.
C:\lazarus\fpc\3.0.4\source\rtl\objpas\character.pas
Yes, as I wrote the problem is not related to Lazarus or its release candidate anyhow.
It is caused by an external package (UTF8tools) having a unit name conflicting with FPC's libraries.
UTF8tools should respect the choice of unit names in FPC libs and name its units differently. Now also dotted names can be used.
Please contact its author about the problem.