"Most shops around here refuse Scottish notes as we had a spate of bad ones. Then recently I had a good customer with 50p pieces from the IoM. He claimed it was legal tender because it had the Queen's head on it."
Well, so does Canadian money, Maltese money and that from the Falkland Islands. Short answer is, yes, he can refuse the Scottish notes. The Channel Islands and the Isle of Man are Crown Dependencies and make their own money which is only legal on their own patch and not acceptable in the rest of the UK.
Now for a masterclass on legal tender. Neither Scottish nor Northern Irish notes are legal tender, not even on their own turf. Only Bank of England notes are legal tender but only in England and Wales.
However, the term legal tender does not in itself govern the acceptability of banknotes in transactions, so it doesn't mean much. What goes on over the counter is a matter of agreement between you and your customers. Legal tender has a narrow technical meaning in relation to the settlement of debt.
Scottish and Northern Irish banknotes, however, are legal currency they are approved by the UK Parliament. It should be pointed out that, in Scotland, despite no banknotes whatsoever qualifying for the term 'legal tender', the Scottish economy seems to manage quite well without that legal protection.
It makes commonsense, of course, that if you operate near a border, you are going to be more flexible. Anyone retailing in Dover and refusing euros would be daft. And if you are close to the Scottish border you have probably become adept at recognising the McDuff notes and will therefore be on safer ground than Stoke Newington retailers.