What is wrong with this circuit simulated in Proteus?

The circuit should work, so the possibilities are

1) a bad component (FET, LED),

2) a wiring mistake, or

3) a wrong value resistor (1M instead of 1k for R2 for example.)

A small LED should show some emission with 5-10mA, but maybe your LED needs more current to glow brightly.

I don't understand if this is a physical circuit or a simulation.

For starters, you're supplying a relatively low current to the LED, about 7mA. I suspect this is too low, but also that you should see it glow dimly when on.