Locally in the BVI the BLUE back ground flags are for LAND use and denote the Land Based Government. On the
Water the RED back Ground is proper.
Although the formal British Flag is considered acceptable, you may find that locally it is often considered an affront to the semi independent
British Virgin Islands government. Those with the "virgin" are more acceptable.
In the recent past, several measures to totally change the BVI flag from the near British Flag have been considered but were defeated.
I fly the BVI flag as my courtesy flag. I have know some cruisers to be verbally reprimanded but no citation given by some "officials" for flying the British Flag in place of the BVI flag.
When I originally started coming to the BVI I asked many people about the blue and red flags. 90% had no idea what the differences were but those with an opinion (including customs and immigrations officials) were generally in agreement that the red was for the seas and blue used by government officials only... this is NOT true. Many of the locals don't know anything about the blue background flag, and think it is for another country.
Bottom line is it does not appear to actually matter to most people... but a few do get their dander up about what is considered by them to be an affront. This appears to be avoided by those few by using the BVI flag with red background