Brian – thanks for these thoughts. Your first suggestion may have hit the nail on the head and I have to say it's something I hadn't even considered. The stuff I used was part of a kit I had lying around designed for grinding valves in car engines – probably too coarse. After reading your reply I just used some Peek fine metal polish on the valve seats and then twisted the valves by hand for a few minutes until it felt very smooth, cleaned it all up and refitted the valve housings. I am now struggling to feel any air getting past. So I will now fully reassemble the engine and see if I can get it to fire up. If I can I will be extremely happy. If not it will probably be the next issue to do with the carb or the timing or the points 
Yes, the valves are closed when the rockers are relaxed, I have been testing this with rockers removed to rule out that possibility. The valve springs feel strong enough – but I don't really know.
Rod – thanks for that. I have some of that product and thought about using it but wasn't sure if it would work at the temperatures next to the exhaust valve. Did you use it on the end of the housing that is inserted into the head or on the flange that is bolted on the surface of the head – or both?
One issue I have found with the head in this engine is that the alloy casting, once machined to drawings, is very thin and weak in places. One tapped hole for a valve housing had to be so shallow that the thread stripped – I have got around this for now by loctiting the stud in place.
Thanks again and I will post an update.