Not sure where you heard that it was not supported but we do support Lotus Workf low 7 on Notes/Domino 8.5.3. See this technote regarding support: https://www-304.ibm.com/support/docview.wss?uid=swg21293563
As far as it working with Upgrade Pack 1, while we have not tested it, it should work just fine. Upgrade Pack 1 is an additional set of files that get applied to 8.5.3. It does not modify any of the existing 8.5.3 files and thus should have no impact on Lotus Workflow 7.