Okay well I finally managed to get this problem fixed, but did three things so not sure which one did the job. First of all I changed the workgroup names on both Pc's to MSHOME. (I know the name doesnt matter but I just made sure they were both the same.)

I also ran a winsock fix on the laptop as that was the one that seemed to have all the problems as whenever I tried to access the workgroup it would lock up and I would get no response.

Finally I turned off simple file sharing on the desktop, although I was reluctant to do this as the laptop has XP Home. I rebooted both at the same time and the network worked once again. So who knows what fixed it, but my guess is the winsock fix (although I always had internet access on the laptop.) or turning off simple file sharing, but isnt that what xp home has to use anyway??