With apologies for:
1) BIG post
2) Copyright liberation
http://www.siliconglen.com has a pretty thorough explanation...
All Scottish banks have the right to print their own notes. Three choose to do so: The Bank of Scotland (founded 1695), The Royal Bank of Scotland (founded 1727) and the Clydesdale Bank (owned by National Australia Bank). Only the Royal Bank prints pound notes. All the banks print 5,10,20 and 100 notes. Only the Bank of Scotland and Clydesdale Bank print 50 pound notes.
Scottish bank notes are not legal tender in Scotland. English bank notes of denomination less than 5UKP were legal tender in Scotland under Currency and Bank Notes Act 1954. Now, with the removal of BoE 1UKP notes, only coins constitute legal tender in Scotland. English bank notes are only legal tender in England, Wales, The Channel Islands and the Isle of Man. In Scotland, 1 pound coins are legal tender to any amount, 20ps and 50ps are legal tender up to 10 pounds; 10p and 5ps to 5 pounds and 2p and 1p coins are legal tender to 20p (separately or in combination). 2 pounds coins and (if you can get hold of one) 5 pound coins are also legal tender to unlimited amounts, as are gold coins of the realm at face value (in Scotland at least).
Northern Irish notes are not legal tender anywhere, a situation similar to Scottish notes. Whether Scottish notes are legal tender or not does not change or alter their inherent value but it dictates their legal function. Credit cards, cheques and debit cards are not legal tender either but it doesn't stop them being used as payment. Only a minuscule percentage of Scottish and British trading is carried out using legal tender. Just because something is not legal tender certainly doesn't imply it's illegal to use.
The lack of a true legal tender in Scotland does not cause a problem for Scots Law which is flexible enough to get round this apparent legal nonsense, as was demonstrated some time ago when one local authority tried to refuse a cash payment (in Scottish notes) on the grounds it wasn't "legal tender", but lost their case when the sheriff effectively said that they were obliged to accept anything which was commonly accepted as "money", and that should their insistence on "legal tender" have been supported, it would have resulted in the bill being paid entirely in coins, which would have been a nonsense; stopping short of saying that the council would have been "cutting off their nose to spite their face", but seeming to hint at it.
For tourists: You can spend Scottish notes in England and they are exactly equivalent to their English counterpart on a one for one commission free basis. If changing Sterling abroad, do not accept an inferior rate for changing Scottish notes than is being offered for English notes as the two are equivalent. You are very unlikely to encounter problems spending Scottish money in England, I did it for many years and was never refused.
The definition of legal tender is something which is acceptable as payment of a debt. If you pay using legal tender, the other person has no recourse to chase you for payment. As part of the Skye Road Bridge tolls protest, people have paid in small coins using the greatest number of small denomination coins which constituted legal tender. Using entirely 1ps for instance would not have been legal tender and could have been refused. (This definition is a simplification, see the Currency section of "Halsbury's Laws of England" for a full legal definition.)
Britain came off the Gold Standard more than 60 years ago. The Scottish banks are allowed to issue a relatively small amount without backing, and the remainder of their issue has to be backed by Bank of England notes to the same value. So the BofE goes bust, the others go with it.
