I agree that, if the wiring is connected as per the diagram, it is likely to be the headlamp switch still giving a feed from the dynamo to the coil as you say. Having looked at the wiring diagram this is my take on how it SHOULD work
The wiring diagram with the 7 pole switch shows the switched power feed is from Terminal 3, via the ignition switch, to the coil terminal SW.
It shows a second wire from The SW side of the coil to terminal 7 and from there to one side of the Red Spot lamp in the ammeter. There is also a wire from the the D terminal wire of Dynamo (power feed from dynamo) to terminal 6 and from there to the other side of the Red Spot lamp.
It is my understanding that this circuit causes the Red Spot lamp to illuminate when the ignition is turned on i.e. power feed from battery via ignition switch travels via coil SW to terminal 7, through Red Spot lamp and then via Terminal 6 to Dynamo D wire which, as the Dynamo is producing no charge, is earthed via the charging circuit.
When Engine starts and Dynamo is charging the Red Spot now has a power feed from Dynamo D wire via Terminal 6 AND battery power via Terminal 7 and as there is now no potential difference across the bulb (so no current flow) the bulb goes out.
Now for the bit I am not quite sure about but it makes sense to me....When you switch the ignition off that cuts the power (current) from the battery to the SW side of the coil. Whilst the second wire to the coil SW, which is now being fed Dynamo power via the Red Spot bulb circuit described above, the Red Spot bulb (according to an article on the Vincent owners clud site) is only rated at 0.6 watts so it only draws 0.1amps which is not enough current to operate the ignition coil and therefore the engine stops.
So...first thing would be to disconnect the wire that goes from Coil SW to Terminal 7 and isolate / insulate the disconnected end. (It's only part of the Red Spot lamp circuit so should not effect anything else). If what I have said above is correct the ignition switch should work normally.
I think the most likely cause of the problem is that the light switch is providing battery power to terminal 7 or 6 when it is in the off position, you could check this using a volt meter.
As for the earth wiring I would wire the battery terminal to the earth point on the frame and use a separate wire from the regulator.
I would also suggest adding some fuses in the battery and charging circuit from the Regulator. Have a look at Simon's website here for some pointershttp://ariel-square-four.blogspot.com/p ... iring.html