Workers who have coronavirus tests paid for by their employer will not have to pay tax on them after all.
On Monday, HMRC said that the tests would be treated as a "benefit in kind", and so would be subject to extra income tax for employees.
But after questions in the House of Commons about the issue, the Treasury granted tax exemption for the tests.
The exemption will be in effect for any tests that have taken place during the current 2020-21 tax year.
"Given the importance of widespread testing, we want to ensure that all employers who wish to provide third party testing to their employees can do so without increasing their tax liability," a Treasury spokesperson said.
"So we will introduce a new income tax exemption for Covid-19 antigen tests provided by employers.
"HMRC will amend their guidance as soon as possible to reflect this change."
The issue had been raised by Treasury Committee chairman Mel Stride.
"Many employees, especially healthcare and hospitality workers, are required to undergo regular coronavirus testing," said Mr Stride.
He said Monday's guidance from HM Revenue and Customs had been "unclear" and would "worry a large number of workers".
"Many of our key workers could be faced with the perverse incentive of avoiding employer-sponsored tests in order to reduce their tax bill," he added.
In the House of Commons on Tuesday, Mr Stride urged the chancellor to investigate the issue.
Mr Sunak said: "I'm delighted with him for raising this with me and of course we will look into it very quickly."
That led to the Treasury granting exemption for the tests late on Tuesday evening.
Commenting on the change, Mr Stride said: "It would not have been right to increase the tax bill for workers every time that they had a coronavirus test. I'm glad that common sense has prevailed.
"And I'm grateful that the chancellor has listened to the Treasury Committee and reversed this decision so swiftly."
Benefits in kind
Benefits in kind are benefits which employees receive from their employers that are not included in their salary.
They are often referred to as "perks" or "fringe benefits", but usually relate to things such as company cars, private medical insurance paid for by the employer and cheap or free loans.
But some company benefits can be tax-free, such as childcare and canteen meals.
HMRC's guidance published on Monday but withdrawn late on Tuesday stated: "Coronavirus (Covid-19) testing kits or tests carried out by a third party which have been purchased by you to provide to your employees are treated as a taxable benefit in kind on the employee."
Until the guidance was withdrawn, that meant a cash value would have been assigned to the coronavirus test by the employer, leaving the employee to pay income tax on the amount through PAYE.
Regular Covid-19 tests are currently available through the government testing programme to a wide range of employees.
If an individual is tested through the government testing programme, there will be no tax liability.
For example, care home staff can access weekly testing to see whether or not they exhibit symptoms.
It means that in the vast majority of cases, those who need to be tested can access testing through the government programme.
As most workers will already be able to access tests for free through the NHS, the Treasury said it expected the new exemption to only affect a small number of individuals.