School colour-codes pupils by ability

Students with purple ties are gifted and talented. All the children at Crown Woods college in Greenwich, south London, know that. They are taught in separate colour-coordinated buildings, play in fenced-off areas and eat lunch at separate times. At 11 years old, all pupils at the college are streamed according to ability in what the headteacher argues is the only way to survive in the brave new world of market-driven education.

Crown Woods re-opened in May this year after a £50m rebuild under the Building Schools for the Future programme. Based on a small-schools model in the US, the pupils are ranked as they leave primary school and put into one of three "mini-schools" on site. The gifted and talented go to Delamere. They have purple badges on their smart blazers. The rest go to Ashwood, which wears blue, or Sherwood, which wears red. These two schools are more mixed ability, but they are still streamed into three tiers. Each school has 450 students and functions independently. There are no shared subject departments.

The light, bright white corridors in the nine new buildings make the site feel more like an art gallery than a state comprehensive. The state-of-the-art competitive gym with capacity for 450 people feels like a professional facility. There is a sensory garden and design centre named after William Morris. The use of prefects, the school's stately crown logo and the formal use of the tie in the uniform add to the traditional posh-school image, but this school's facilities are available to all students, and it offers vocational subjects.

The headteacher, Michael Murphy, glows with pride at the new set-up. The son of Irish immigrants who was rejected by a secondary modern before being educated at a mixed comprehensive in Brixton, he is keen to point out all the ways in which standards have been driven up. When he took over the school, it was in special measures, and was "losing out" to grammar schools in Bexley and the selective comprehensive schools in Bromley. Now Murphy says the school is over subscribed for the first time, and is enjoying a more balanced intake of social classes and abilities. The reason, he says, is the streaming.

"I felt if we made explicit the provision for high-ability children, we would be able to attract those children and their parents who would rather not put them in to take the Bexley 11-plus, but would feel comfortable with the type of provision we'd make for them – and that's entirely what's happened."

But he believes the model is better for all students, not just the gifted and talented. "Combining setting with the small-schools model is a powerful combination that allows highly personalised learning. Mixed-ability teaching in state schools has patently been shown to have failed – our model allows all students to work at their own level and get the support they need."

Although GCSE results here remain below local grammar schools, they have been improving; 45% of students gained five A*-Cs including English and maths this year, up 14 percentage points from three years ago. Five per cent of students achieved the government's new Ebacc measure. Ofsted ranked the school as good during its last inspection in 2009.

But Murphy says that without setting, the school wouldn't have survived. He says that he has heard of other schools using different colour uniforms to mark different "houses", but the idea of using different colours for different streams came from his "own head".

"I think it was Mrs Thatcher who said you can't ignore the market, you have to respond to it. If we had a system that really recognised value added, it would be different. But we have a system that increasingly focuses on results. If you have a really hard-nosed view and want your school to succeed, this is what you have to do. We wouldn't have attracted the students otherwise."

The school's students are all positive about the new building and take pride in their smart uniforms. Some tell me they like the small-school model, because it makes them feel safer than being left in a playground full of thousands of students they cannot name. Some of them, however, are not so keen on the overt streaming model.

One girl aged 15 who attends Sherwood school says that students in the top school "look down" on students in the other ability schools like hers. She says arguments and fighting have broken out between different schools, which she says started when the students were told which block they'd be going into.

"If you were friends with someone in Delamere, you are kind of enemies now, because you don't want to talk to them. If you talk to them you kind of feel like you're betraying (your school)."

"There was an argument in the school the other day and the girls were arguing between the fences ... it just feels like we've been cut off from them."

"They say if you're gifted and talented you'll be in Delamere, but there are other people in Sherwood and Ashdown that are gifted as well."

Another girl, also 15, worries the system could hold her back. The student, from Sherwood, wants to do triple science to become a neuro-psychologist, but can't. There is only space for her to do additional science in her timetable, something that she says "doesn't seem fair at all". The college says it will be making space for more triple-science provision next year.

Other students, though, say that they still feel united. They point out that many activities – including sports and music events – still allow opportunities for mixing across the college. Eylul Arif, 12, who has been put in Delamere, says: "Although we're split up, we're all friends. They look up to us, we look up to them. We're different visually, but we all go to the same school."

Streaming existed on the old school site, but differences in uniform corresponded to different ages rather than abilities. Students at different levels weren't taught in separate buildings and it was more common to move between sets. Under the new system, it is still possible to move, but the emphasis on the small-school community means that there is a reluctance to allow too much mobility. There is no systematic review of students' school allocation, and none has yet moved in the two months since the school opened.

Students are allocated a school in the college when they first arrive. They are allocated schools on the basis of their year 5 banding score, a teacher assessment and a cognitive ability test. Although there are around 1,800 students at the school including the sixth form, only two parents have questioned the stream given to their child.

Justine Kirkham is a new teacher who has been working at the school for 18 months. She asked to be put in Sherwood or Ashdown so she could "earn her stripes", and says she has seen a huge improvement in behaviour.

"Some students in the past had real behavioural problems and there is now far less trouble," she says. "There is the ability to personalise learning, and people who are struggling can actually get the help they need. Instead of being one of the less intelligent kids in the class, they are now able to do as well as everyone else. If they had been mixed and mainstream, I can't imagine them doing better. I just had a student get 4Bs rather than 3Bs. In our grade that's the target, but if it was across everyone he wouldn't have felt the same."

But this sort of approach is controversial. Kevin Courtney, deputy secretary at the National Union of Teachers, condemns the school's practices. "It's really upsetting. The idea of taking a large school and turning it into three mini schools is likely to be good for relationships, but streaming them is a step backwards. All the evidence shows that mixed-ability in places like Finland does better, although people find it hard to believe. The academisation of the school system will lead to more backwards steps like this. It leads to competition for children rather than improvement in teaching."

Courtney cites famous research conducted by American teacher Jane Elliott in the 60s, in which blue-eyed children did better and began bullying brown-eyed children after being told that they were superior. "There are very established studies showing that kids take the message that they are given from schools and teachers and internalise them," he says. "We moved away from secondary modern partly for that reason and it is depressing to see the system return."