VC firms are pumping millions into European startups that aim to digitize and automate taxes

• Startups helping people and businesses sort their taxes are attracting investor interest in Europe.
• Tax tech is a relatively nascent industry but has been accelerated by multiple waves of regulation. 
• Founders and VCs say a hitherto conservative sector has been boosted by open banking technology. 

Death and taxes may be two of life’s great certainties — but a new crop of startups want to take some of the sting out of the latter.

So-called “tax tech” startups are emerging in Europe, as founders and venture capitalists see potential in a space that has been slow to innovate.

“As investors, we love companies tackling big universal pain points. And what could be bigger and more universal than tax?” Sophie Winwood, an investor at Anthemis and backer of London-based tax startup Ember, told Insider. “Almost everyone has to deal with it, literally no one enjoys it, and failure to do it correctly could result in severe penalties.”

In the UK, the government’s Make Tax Digital agenda, coupled with the rise of open banking regulation, has fueled momentum.

By 2024, all sole traders and landlords earning over £10,000 ($13,500) in the UK will have to report taxes quarterly using a digital platform. But Ember, founded in 2019, has found that about three-quarters of the more than 4 million businesses set to be impacted don’t use digital software to manage their tax. Though digitization has made it easier to open bank accounts and make instant payments, tax remains slow and painful.

Ember cofounder and COO Dan Hogan said the change in legislation had encouraged innovation.

“Accounting and financial admin is something the majority of small businesses are still doing using quite old-school methods but we’re starting to see some big shifts in consumer behavior towards digital,” he said.

Data on funding for the sector in Europe is scant given that many such companies are lumped into broader categories like fintech or accounting SaaS but it’s clear that investors are increasingly interested in backing companies in the space as tax moves online.

The groundwork for these changes was first laid by PSD2 and other open banking regulations in Europe, which paved the way for new fintech startups GoCardless, Plaid, and TrueLayer. In short, open banking is an innovation that allows consumers to securely give merchants and financial institutions access to their data via a third party, massively improving the speed, cost, and security of transacting between accounts. 

“In many ways the entire industry piggybacks on the success of previous generations of fintech companies,” Mart Abramov, CEO of London-based startup Taxscouts said. “The whole infrastructure just didn’t exist 10 years ago. Also, the industry is very conservative by its nature — so it’s not a huge surprise that it is one of the last movers.”

The issue of course is that tax rules tend to be complicated and convoluted with regular changes to legislation. Technology from startups in the space that can automate processes will be key to better customer experiences in the future, Winwood added.

Open banking tech in Europe is slightly behind the UK but similar startups are emerging in continental Europe with firms such as Taxadoo and Wundertax in Germany, Accountable in Belgium, and Aibidia in Finland among those offering automation tools to individuals and small businesses. Most of what these platforms offer spill into accounting, and not just pure tax with compliance, VAT payments, and data visibility also key to these startups’ growth.