I have read previously (somewhere on GOV.UK) that it is definitely cancelled in the HMPO system as soon as the application is received in the UK, which makes sense as 99% of applications have the expiring passport attached to them. However, as their database is not shared automatically with anybody only they know this and therefore the only place where it ought to be flagged up in on arrival in the UK.
See here;https://www.gov.uk/government/publications/cancellation-of-passports