It was initially formed in 1931 as a Special Reserve squadron and in 1936 became part of the Auxiliary Air Force, at this time based at Manston and Detling.

[17] The Battle of France saw 500's aircraft being involved in increasingly heavy action, covering the evacuation of British and French troops from Dunkirk, and attacking German-held harbours.

[20] While the squadron further modified the armament of some of its Ansons in August for use against German E-boats by adding a 20 mm cannon firing through the floor, it was increasingly deployed on convoy escort duties.

[21][22] In April 1941 the Ansons were replaced with Bristol Blenheims which were deployed on anti-shipping and air-sea rescue duties, as well as night intruder operations over German-occupied Europe.

[21][23] In March 1942, the squadron moved to RAF Stornoway in Scotland, with detachments at Limavady in Northern Ireland for anti-submarine patrols over the Western Approaches.

[21] On 8 November, half of the 500 Squadron ground crew landed along the beaches of Algeria, Oran and Arzeu, after having been dispatched to the Clyde River to board the SS Strathallan.

[26][a] On 13 November, a 500 Squadron Hudson attacked the German submarine U-458 with depth charges and machine gun fire, badly damaging it and forcing it to return to base.

[35] On 27 December, one of the squadron's Hudsons attacked the German submarine U-73, but was badly damaged by anti-aircraft fire from the U-boat, and was forced to ditch.

[40] In late September 1943, and working closely with the Special Operations Executive (SOE), who were also stationed at La Senia developing underwing rockets and radar for the Hudsons, a Hudson and crew from 500 Squadron was chosen to fly into occupied Corsica at Ghisonaccia Gare aerodrome, with the orders to "establish squatters' rights" under the command of Colonel McKenzie of 458 Squadron.

[21][23] On 17 May 1944, the German submarine U-960 launched an unsuccessful torpedo attack against the American destroyer USS Ellyson off Mers-el-Kébir, which resulted in a large-scale air and sea operation to hunt the submarine, involving five American destroyers and saturation air cover from the Wellingtons of 36 Squadron and the Venturas of 500 Squadron.

It operated Martin Baltimore light bombers as part of the Desert Air Force, flying from bases in Italy by day and later by night for the remainder of the war in Europe.

[2][45][46] During World War II the squadron members had been awarded with 1 GC,[47] 2 DSOs, 21 DFCs, 1 bar the DFC, 9 DFMs and one CGM.

Later, following an Air Ministry decision to convert all RAuxAF units to day fighter roles, the squadron became equipped with Meteor F.3s.