@McCarthy, Marc (IT Cyber Security, Group CIO) - Thanks for reaching out.
The error message you are receiving is correct. Whatever is defined with the -NotScope parameter must be within the Scope that is defined.
For example, if the policy is applied to a resource group, then exceptions can only be applied to resources within that resource group.
This is a service level limitation and not a limitation with Azure PowerShell. The same limitation applies to Azure CLI and the Azure portal.
Hope that helps.
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