I was thinking the same thing but didn't reply right away since I am not familiar with the Super 8. But based on other bikes I've done I am thinking the small end of the spacer goes toward the wheel. I think this because it doesn't make sense that the washer that goes between the spacer and the nut would be bigger than the part of the spacer it seats against. Also, and this is even more important, in your first picture you can see the orange seal around the bearing race. The spacer needs to seat against that seal and race to hold in the bearing and seal. It cannot do that if it doesn't fit into the recess there. I am also looking at the wear markings on the spacer and the small end shows that it normally sits INTO the recess and is not exposed.
I may be totally off base here but those are my thoughts.
I just looked up online for "Kymco Super 8 125 scooter rear axle nut torque" and found several results directly to the service manual pages for this information. At bike-parts-Kymco-UK service manual this page shows what you need to know for remove and install of the rear wheel including pictures:
https://www.bike-parts-kymco.uk/catalog/Workshop-manual/super-8-125-Workshop-manual/page145This page shows the torque value for the rear axle nut to be between 11-13 kg-m.
That translates to between 79.56 ft lb and 94 ft lb. 86.8 ft lb is right in the middle of that range. I used Google to search for kg-m to ft lbs to get a calculator for the conversion. Google has such calculators for almost anything it seems.
BTW- I tabbed over to page 143 of that service manual and though the parts breakout picture is very blurry it almost looks like that spacer is shown with the small end OUT... away from the wheel... but it's very hard to tell.
Does the washer that fits between the spacer and the nut slip over the small end of the spacer?
If it does, is the end of the spacer and the outer surface of the washer flush?
In your photo it doesn't look like it would be. I still hold to what I said at the first above.