Once you have the adhoc network created, try this.
Open Network Connections on the host computer. (Click Start, click Control Panel, click Switch to classic view, and then click Network Connections.
Click the connection to be shared, and under Network Tasks, click Change settings of this connection.
On the Advanced tab, select the Allow other network users to connect through this computer's Internet connection check box.
If that still doesnt work, make sure you are using DHCP and not assigning IP addresses manually.
How do I set the DHCP on the laptop cos when I check the properties it says the connection is not DHCP allowed despite the settings on the IPhone set up for DHCP
Would it have anything to do with my firewall even though I have set it to medium?