I've tested the htaccess code I've posted and it seems to work perfectly for me so perhaps the rewrite module isn't correctly enabled as in the past, I have encountered that error while trying to enable the rewrite module.
its not your local pc, thats insignificant, though its good if the development system is configured the same as the real host
mod_rewrite needs to be installed on the host, the server the site will be running on the www
test the .htaccess file given on the web server to see if the host has enabled mod_rewrite
if not enabled you may have to query your hosting company to have it enabled, most hosts do not allow you(me/them) to recompile the OS, for very obvious reasons.
In case you need more info on how to enable it with xampp, I shall post more detailed instructions. First as a backup, copy the file located at C:\xampp\apache\conf\httpd.conf to another location in case you do a few things wrong. After copying that file, open the original at C:\xampp\apache\conf\httpd.conf then uncomment line 118 which should contain the following data:
#LoadModule rewrite_module modules/mod_rewrite.so
To uncomment it, just remove the hash at the beginning. Then save and close the file. After that, do a reboot and .htaccess files should then be enabled.