Hi, I've have tried to search on this subject however nothing turned up, can't believe I am the only person to ever ask this. During some work on the rear end I removed the rear sprocket then replaced it as it came off with the offset away from the wheel, making the chainline wider in effect. Reading through the haynes manual before tightening everything back up it stated that any stamping should be facing out, which it isn't, but nothing about offset. Which way should it be and if it is wrong what damage could it have done during the time it has been on?

if you are saying that the rear sprocket is making the chainline slightly angled rather than dead straight I'd get it sorted ASAP but not worry as chains on bicycles run non straight 99% of the time. Might have caused a little extra wear is all IMO.

Mine has the step on the outside, but this assumes the last person (not me) to replace it did it correctly. The "stamping" may apply to OEM products.

It would wear the chain and sprockets a bit odd and a bit quicker than normal, but I wouldn't worry any more than that. If it has been wrong you'll notice the inside plates on one side will be worn more than the other.

Original sprocket goes on with the offset shoulder on the inside, next to the wheel with the 40t marking showing on the outside.
To keep alignment with the gearbox sprocket, fit after market sprocket the same.
The chain is wider than the sprocket, so the little play helps eliminate any miss alignment if fitted incorrectly.

I asked Rick O about some after market sprockets being marked with the makers name on the inside, where as it would normally be to the outside, he said they fit the same way as original.

Cheers for that. The chain and sprocket will need replacing at some point so I would probably be better off sorting it then by the sounds of it, may do more damage turning it round now. Shows you should never assume that the last owner did ever thing correct.