As of Production Release 8 Update 12 PayPal Bill Me Later does not work with the In Context checkout feature of the PayPal Express Checkout and/or Payments Pro module. If you are wanting to use the bill me later feature in your store you will need to be sure that you do not activate the In Context Checkout on the 'PayPal Express Checkout' tab.

To find this setting you will need to log in to your admin interface and click on Payment Settings and then on PayPal Express Checkout. There will be a checkbox for In Context Checkout and for Bill me Later. If you have Bill me later checked you will want to make sure that that In Context Checkout is not checked. If it is uncheck it and click Update.