It may be that she wants to go for this "unschooling" option, but she will still be obliged to register what she is doing with the LA once the child is of school age; although to be honest the inspection is a bit hit and miss.
Some children simply do not suit school and it is good that the parents can choose another option. But one of the problems is that, even though the motives are good, if home schooling is not done well then children may miss out on opportunities. It is a difficult balance to strike. There is a lot wrong with our schools (and a lot that is good) as they struggle under government edicts and political point-scoring and children sometimes find it hard.
Fishandchips - try googling Education Otherwise. You may learn some stuff that will help you to give a bit of tactful guidance from the sidelines. And you can provide experiences to enrich this little one's life if you stay on the right side of your DD and bite your tongue over some of her practices, as long as the wee lass is safe, cared for and well nourished. You could play appropriate games with her, take her to the zoo, museums or whatever.