Olly,
Based on your picture of the head, I would say that Mdscott was right, the head was shaved (milled) too much. The contact on the head appears to be at the inside edge of the machining marks on the head. I see two choices: 1 Relieve (machine out) the head where the contact is, or 2 replace the head with an unmodified one.
Good luck!

Yes. Someone definitely machined the head considerably.

You mentioned the cylinder was machined too? Can you post a picture of the piston at top dead center?

You definitely need to fix that or there will be a major mechanical failure... hopefully no damage has been done.

Spacer under the cylinder would be a good way... it will also raise the ports which will lose low RPM power and increase higher RPM power... how much difference depends on how much you need to raise it to restore the proper clearance. I'd guess a 1mm (18 gauge Aluminum) spacer with a gasket on each side would be close. Not the best solution... best would be a new head... but the best option without buying new parts. (Stacked base gaskets without a metal spacer tend to blow out.)