The political staffer who set up the alleged NSW Liberal Party slush fund Eightbyfive has been warned he could go to prison if he is found to have lied to the Independent Commission Against Corruption (ICAC).

On his second day in the witness box, Tim Koelma was repeatedly asked if he wanted to recant his earlier evidence.

The ICAC is investigating allegations Mr Koelma set up Eightbyfive with former NSW energy minister Chris Hartcher and issued sham invoices to hide donations for favours.

But Mr Koelma has insisted that he provided legitimate advice to the companies that made regular payments to Eightbyfive, including Australian Water Holdings, Gazcorp and Buildev.

A frustrated counsel assisting, Geoffrey Watson SC, told Mr Koelma: "Even if you relent now and tell the truth, people might go easy on you... It's time to get out Mr Koelma."

But Mr Koelma stuck by his earlier evidence.

Mr Watson then warned him of the serious consequences of lying to the ICAC.

"At lunch time you can take a cab out to Malabar [the home of Long Bay Jail] and take a good look around," he said.

Mr Koelma did admit that he lied to a lawyer from Liberal Party headquarters, Bran Black, who had started investigating Eightbyfive's activities in 2012.

He said he lied about his involvement in the company and gave a "cagey response" to Mr Black's questions because he was being confronted with "unsourced and unsubstantiated allegations".

The inquiry has also heard that Mr Koelma appeared to have used a code in emails to Mr Hartcher about Eightbyfive's clients, whom he referred to as "friends".

Mr Koelma agreed that he used the word "Sydney" to refer to Gazcorp, "west" to refer to Australian Water Holdings and "north" to refer to Buildev.

But he insisted it was not a code but a "colloquialism".

Mr Watson suggested that Mr Hartcher was the "mastermind" of the Eightbyfive scheme.

Mr Koelma replied, "Absolutely not".

Inquiry hears money used to buy new suit

The corruption watchdog heard allegations that central coast Liberal MP Chris Spence used money from developers to bankroll his 2011 election campaign and buy a new suit.

Mr Koelma agreed that he withdrew thousands of dollars from EightbyFive's account and gave it to Mr Spence in the lead-up to the 2011 election.

At the time Mr Spence was the Liberal candidate for seat of The Entrance and the inquiry already heard he had no other source of income.

Mr Koelma insisted he made the payments to Mr Spence because he had subcontracted him to provide advice to EightbyFive's clients, including the developers, the Gazal family.

When asked whether he thought it was inappropriate for a Liberal party candidate to be working for developers during an election campaign, Mr Koelma said: "I don't think there'd be anything technically wrong... but from a PR standpoint there may be some concern."

Mr Watson asked: "Wasn't this just funding Mr Spence's campaign for the Entrance with the money acquired by EightbyFive?"

"No and I'm not sure you can draw that inference," Mr Koelma replied.

He rejected Mr Watson's suggestions that the Gazals were effectively funding Mr Spence's campaign and he was taking a small cut.

Text messages between Mr Koelma and Mr Spence were also tendered where Mr Spence asked: "Have my guys shown some love?" and added that he was in Vietnam and wanted to buy a suit.

"No love yet, but will transfer when it arrives," read the reply from Mr Koelma.

Mr Koelma was also asked about thousands of dollars in cash he gave another central coast Liberal candidate, Darren Webber.

Mr Webber is now the member for Wyong.

Mr Koelma said he paid Mr Webber in cash because it was "more convenient".