The Beaufighter had demonstrated its performance by the fall of 1940 as the first Beaufighter Is entered squadron service. However well the Beaufighter performed though, the Short Stirling heavy strategic bomber program had a higher priority for the Hercules engine.

The result was the Rolls-Royce Merlin XX-powered Mark IIF night fighter. Roy Fedden, chief designer of the Bristol engine division, advocated for adoption of the improved Hercules VI for the Beaufighter. This idea was soon passed over in favor of the Griffon engine due to the fact the Hercules VI required extensive development before it would be ready for service. However, production of the Griffon was reserved for the Fairey Firefly. Thus, the Air Ministry opted for the Merlin as a powerplant for the Beaufighter until the production rate of the Hercules could be raised by a new shadow factory in Accrington. The standard Merlin XX-powered aircraft was later called the Beaufighter Mark IIF.

In February 1940, an order was placed for three Beaufighters to be converted to use the alternative Merlin XX engine. The engine installation and nacelle were designed by Rolls-Royce as a complete "power egg." The design and approach of the Merlin installation for the Beaufighter was later incorporated into the design for the Avro Lancaster.

In June 1940, the first Merlin- powered aircraft conducted its first flight. The second was delivered in late 1940, the third having been destroyed in a bombing raid. Flight tests found with the Merlins, the aircraft underpowered,. Additionally, it had a pronounced tendency to swing to port, making take-offs and landings difficult and later resulting in a high accident rate; out of 437 Beaufighter IIF’s produced,102 were lost in accidents. The

The success of the converted prototypes led to production aircraft in 1941. In late April 1941, the first two Beaufighter Mark II aircraft, R2277 and R2278, were delivered to 600 and 604 Squadrons, with 600 being the first to receive the type in quantity in the following month.

600 Squadron, the first to be fully-equipped with the IIF, was based at Predannack in Cornwall, where they could intercept enemy bombers using the Irish Sea and St. George’s Channel for attacks on the Merseyside cities and Belfast. They were also tasked with intercepting Fw-200 Condors that flew out to the Western Approaches on weather reconnaissance.

While the Beaufighter IIF had a superior high-altitude performance to the Hercules-powered Mk. I, 600's CO, Wing Commander Pearson, wrote that it was “...an unnatural and dangerous aeroplane... intended to counter a high-altitude threat which never materialised... The change of engines altered the centre of gravity and and made the aircraft unstable at low speeds. No matter how the aircraft is trimmed, it will never fly straight and level hands off.” He concluded, “The Beaufighter is a great aeroplane; the Merlin is a great engine. Together they are a great disaster.” By the end of 1941, the squadron reported they were “...fortunate to receive Beaufighters with trusted radial engines.”

Other squadrons operating the Beaufighter II reported similar problems. The Polish pilots of 307 squadron complained so loudly that it had been “fobbed off” on them that the squadron was one of the first to receive the new Beaufighter VI that solved most of the difficulties of the Mark I and II Beaufighters in April 1942.

Some 22 Mark Iis were also supplied to the Fleet Air Arm of the Royal Navy, where they were used as high-speed target tugs. By mid-1942, the Beaufighter IIF had been taken off operations and the last of them were operated by Operatonal Training Units until 1944.