Clicking on Formatter does not format the SQL statement in the editor.
There are limitations in the statements the Formatter can format. In general, it can only format insert, update, delete, and select statements. It won't work on the declare, open, fetch, statements. Some statements may be too long or complicated to format. The Formatter will improve with each release of Toad for SQL Server.
Highlight parts or sections of your SQL Statement and click on Formatter to format pieces of SQL that it supports.